Fed official warns caution needed on rate cuts amid rising inflation
With the Personal Consumption Expenditures index rising at 3.5% in March, the official urges the Federal Reserve to hold steady until inflation returns to the 2% target
Chicago Fed President Austan Goolsbee has warned that recent inflation data presents significant challenges for the Federal Reserve, describing the situation as bad news for the central bank. Speaking on Saturday, Goolsbee emphasised that the institution must exercise caution regarding interest rate cuts until inflation clearly begins to recede back to the 2% target. His comments come as markets await further direction from the Federal Open Market Committee following a highly divided vote last week.
The central bank's preferred inflation measure, the Personal Consumption Expenditures price index, rose at a 3.5% annual rate in March, a figure Goolsbee cited as the primary driver for his caution. He noted that inflation is reportedly rising even in service industries, which are typically insulated from tariffs and rising oil prices linked to the U.S.-backed war with Iran. This persistence in sectors usually less sensitive to external shocks intensifies the risks Goolsbee previously identified in December.
Goolsbee highlighted that the composition of current inflation does not look good, suggesting that the underlying drivers remain stubborn. This sentiment aligns with the split decision made by the Federal Reserve last week, where an 8-4 vote was required to hold rates steady in the 3.5% to 3.75% range. This was the most divided vote since 1992, with three governors dissenting specifically against language suggesting a rate cut was the most likely next move.
Although Goolsbee is not a voter on rate policy this year, his dissenting views mirror those of the three governors who opposed the forward guidance in the recent meeting. He argued that the split decision complicates the Fed's ability to offer clear forward guidance on the path of monetary policy. The uncertainty surrounding the specific timeline for when inflation might begin to recede remains a key concern for institutions monitoring the outlook.
Beyond the immediate policy implications, Goolsbee expressed support for current Chair Jerome Powell remaining as a governor after his term as Chair ends. He described Powell as judicious and insightful, stating he would be happy to see him switch to a governor's seat while still being present. Goolsbee also expressed excitement about the arrival of incoming Chair Kevin Warsh, who is awaiting Senate confirmation in the coming weeks, noting he looks forward to seeing the mark Warsh will make on the institution.
